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Legal damages are taxable income

originally posted: 11/22/2006 reposted: 2/18/2011 This post has not been recently reviewed or revised by the author and may be out of date. If you notice an error or are in doubt, please send a new question by email or ask for an update. Email asktony@tonynovak.com.

Q: Do damages awarded in court have to be reported as income?

A: Yes. Court-ordered damages are taxable income. The only exception is that personal injury awards are not taxable. Personal injury awards sometimes include nontaxable punitive amounts. In many cases there will be off-setting deductions that reduce the net effect of a taxable court settlement. If you are expecting a legal settlement, then the important thing is to work with a tax adviser before your attorney gets to the settlement stage of the legal process. If you wait until after the case is settled to ask tax questions, then there is little ht can be done to reduce the tax.

Legal damages are taxable income

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